"We have at present a customer who is too often not equipped to understand financial products, and whose judgement is therefore unreliable. And we have a sales force which too often has acted irresponsibly - and where that behaviour has historically been encouraged rather than discouraged by the incentives which their managers have used," said McCarthy.
In September, Lloyds TSB was fined £1.9 million by the FSA for mis-selling high-risk investment bonds called 'precipice bonds'. Lloyds subsequently paid out almost £100 million in compensation to customers that had lost money on the investments. Lloyds Treasury Services structured the product as a basket of put options with a barrier set against them. The effect was a down-and-in barrier product, with the investor selling put options for premium that funded relatively high coupon payments.
McCarthy warned banks to pay careful attention to ensure that customers fully understand the products they buy, that internal controls are put in place and that sales teams are rewarded for responsible behaviour.